A new regulator to cover the not-for-profit sector is being set up to take over from ASIC but working out an acceptable definition of a charity may be its biggest challenge.

From July 1, a new body, the
Australian Not-for-profits and Charities Commission
(ACNC), will replace the Australian Securities and Investments Commission (ASIC) as the regulator of charities. Like ASIC, it will deliver its rulings to the Australian Taxation Office.

Former Victorian bushfires royal commissioner
Susan Pascoe
is six months into her one-year role as chairwoman and interim commissioner of the implementation taskforce.

The commission’s title is a misnomer because not-for profit groups that are not charities won’t fall under its jurisdiction, at least not until a review in 2014.

In the meantime most not-for-profits that are not charities, such as sporting clubs, will continue to be regulated by state government bodies.

Australia has no statutory definition of a charity, so the first major duty of the ACNC will be to introduce one by July 1, 2013. In theory, what constitutes charity, as distinct from merely a public good, is still defined at common law based on the preamble to statute of Queen Elizabeth dating from 1601. In practice, the ATO delivered a final ruling of its definition in October 2011 and its granting of tax-deductible gift recipient status acts as a de facto registrar of charities.

Pascoe anticipates “codification of the common law" rather than any significant change.

As per the 400-year-old tradition, the relief of poverty, promotion of religion and advancement of education are accepted as a charitable purpose by default. Other good causes may also be ruled to be a charitable purpose but organisations need to prove their merit on a case-by-case basis.

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The law does not make a distinction between charities run by religious organisations (such as St Vincent de Paul) that deliver very tangible benefits to the community in the form of social services and churches that use their charitable tax status to promote their pastoral causes. A sticking point for regulators is defining the role of advocacy as a charitable activity.

“Charities work with low-income and disadvantaged people and it’s a part of our role to give them a voice," says
Red Cross Australia
CFO
Sandy Chakravarty
, “so long as it is within the bounds of the organisation’s fundamental principle of political neutrality."

Chakravarty believes Australia has a much better history than most nations at recognising the role of advocacy in charitable activities, citing as evidence a “history of government funding of legal centres and peak bodies for disadvantaged groups". Some charities such as Amnesty International have advocacy at their core.

What the government wants to avoid is the risk of lobby groups getting charitable status.

“It’s important that the governance requirements provide assurance that advocacy is carried out in a non-politically partisan way," says Pascoe. “So it’s very important to get the balance right in the definition."

Australian Council for International Development
(ACFID) executive director
Marc Purcell
recalls, “In 2003, the government tried to revise the definition of a charity but there was pushback because [former prime minister John] Howard had an aversion to advocacy being recognised as a legitimate part of the role of a charity and a preference for formalising and retaining the Elizabethean definition".

Reforms to the rules about what commercial activities charities can undertake are being led by Treasury. New commercial activities started after the 2011 federal budget may find they have tax obligations back-dated to a July 1, 2011, start date.

The proposed reforms aim to crack down on “unrelated" commercial activities, says
KPMG
partner
Daniela Chiew
. Some charities may find they need to spin out some of their fund-raising activities in to a separate, taxable, commercial arm. The Hillsong Church’s music publishing and recording business may be one such example.

Chiew says “there’s a perceived risk if charities are undertaking commercial activities of the funds raised not being directed to altruistic purposes". Such concerns “include money laundering and the funding of terrorist organisations," she says.

Chakravarty is concerned that the proposed income-generating restrictions will “muddy the waters" and be hard to follow. She argues that charities should be being encouraged to innovate with income-generating activities, not discouraged.

“So long as the right governance controls are in place to ensure those profits are being used to make the charity sustainable and not misdirected to executive or board payments or political lobbying, then generating income and delivering charity shouldn’t conflict," Chakravarty says.

Getting the states and territories to agree on any definition of a charity is another challenge facing the ACNC.

Pascoe is “hopeful" the not-for- profit working party of the standing council on federal financial relations – a formal mechanism chaired by Treasury that has all states and territories participating – will come to an agreement . Although she admits that “no one else expects it to work out".

Purcell says it will be a “Hurculean task to get all the states to agree" particularly because “the federal Opposition will be reluctant to support it vocally".

Either way, Pascoe says that as much as she believes the states can reach an agreement, if that proves too difficult, the commission will push ahead at a federal level with or without them.